ISSUE: How the profession should respond to legislation that requires insurers to have annual audited statutory financial reports of insurance companies.
All states require domiciled insurance enterprises to submit to the state insurance commissioner an annual statement on forms developed by the National Association of Insurance Commissioners (NAIC). The states also require that audited statutory financial statements be provided as a supplement to the annual statements.
The insurance laws and regulations of most states require insurance companies domiciled in those states to comply with the guidance provided in the NAIC Accounting Practices and Procedures Manual except as prescribed or permitted by state law.
In 1999, the NAIC completed a process to codify statutory accounting practices for certain insurance enterprises, resulting in a revised Accounting Practices and Procedures Manual effective January 1, 2001 (the “revised Manual”). In 2006 the NAIC adopted changes to the Model Audit Rule related to Sarbanes-Oxley, with the majority of the changes effective for 2010. The key areas of focus for the NAIC were auditor independence, corporate responsibility, and enhanced financial disclosures.
Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state. States may adopt the revised Manual in whole, or in part, as an element of prescribed statutory accounting practices in these states. Auditors of insurance enterprises should review state laws, regulations, and administrative rules to determine the specific prescribed statutory accounting practices applicable in each state.
WHY IT’S IMPORTANT TO CPAs:
The revised Manual and annual instruction statement requires insurers to engage an independent CPA to prepare specific reports and letters and, in certain instances, to report to state insurance commissioners, to make available and maintain working papers, and to conduct audits in accordance with statutory auditing standards.
The AICPA supports the revised Manual as developed by the NAIC.
It is expected that most states will require insurers to comply with the revised model rules by 2010. It may be necessary for some states to take legislative or regulatory action to adopt the revised Manual, while other states will not require legislative action to change the rules for this new compliance. As of early 2009, 11 states (Virginia, Alabama, Delaware, Iowa, Massachusetts, Michigan, New Hampshire, Ohio, Oregon, Wisconsin and Wyoming) have adopted the changes to their regulations. Thirteen states (California, Connecticut, Illinois, Indiana, Nebraska, Nevada, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee and West Virginia) have proposed but not adopted the changes. Alaska adopted enabling legislation, but regulation changes to implement the 2006 revisions have not yet been adopted.
Highlights of the significant changes made to the Model Audit Rule related to Sarbanes-Oxley include:
Section 7: The time allowed to serve in the capacity as the lead or coordinating audit partner was decreased from seven to five consecutive years with a new five year break in service (previously two years), effective beginning with year 2010 statutory audits.
Section 7: There is a list of non-audit services that cannot be performed by the auditor in conjunction with the audit (the prohibitions generally agree with those designated by the SEC) effective for the year 2010 statutory audits.
Section 9: To the extent required by AU 319, Consideration of Internal Control in a Financial Statement Audit, (AICPA, Professional Standard, vol.1) for those insurers required to file a Management’s Report of Internal Control Over Financial Reporting pursuant to Section 16 (see below), the independent accountant should consider the most recently available report in planning and performing the audit of statutory financial statements.
Section 11: Auditors should prepare a written communication of any unremediated material weaknesses that the insurer will furnish the domiciliary commissioner, effective beginning with year 2010 statutory audits. The current Model Audit Rule requires the auditor to prepare a report of significant deficiencies and material weaknesses in the insurer’s internal control structure noted by the auditor during the audit. The AICPA NAIC Task Force has, for several years, undertaken efforts to confirm that states will accept the reporting of only those significant deficiencies and material weaknesses that are unremediated as of the balance sheet date, and it will continue to do so until the year 2010 effective date of the revised Model Audit Rule.
Section 14: There are new specifications for the responsibilities of audit committees and the required qualifications of audit committee members, effective January 1, 2010. The premium threshold that triggers the requirement for independent audit committee members is $300 million assumed and direct premiums. The premium range for a majority of independent audit committee members is $300 to $500 million. The requirement for a supermajority of independent audit committee members is $500 million in premiums. Notwithstanding premium volume, all insurers are encouraged to structure their audit committees with at least a supermajority of independent audit committee member.
Section 16: Every insurer required to file an audited financial report that has annual direct written and assumed premium of $500 million or more shall prepare a report of the insurers’ or group of insurers’ Internal Control Over Financial Reporting and file it with the Commissioner, effective December 31, 2010. The Model Audit Rule also includes a list of what should be included in Management’s Report of Internal Control Over Financial Reporting. This report is prepared by management and is not audited. Section 9 (highlighted above) specifies the independent accountant’s responsibilities as they pertain to this report.
AICPA STAFF CONTACTS:
Kim Kushmerick, Accounting Standards, 212/596-6160